Iraq’s odious debts

Russia and France have good reason to oppose a war with Iraq: They stand to lose more from Saddam Hussein’s ouster than any other countries in the world.

Russia is the world’s largest holder of Iraqi debt, a legacy of Soviet-era military sales that is unlikely to be repaid should Saddam’s regime fall. In a recent Washington meeting of Iraqi exiles, the Iraqis decided to honour debts incurred for legitimate civilian purposes in a post-Saddam Iraq but to repudiate debts incurred for illegitimate military purposes. Russia’s fragile economy can ill-afford this debt repudiation, estimated at US$12-billion, particularly since Russia’s oil industry will suffer should a post-Saddam Iraq rapidly step up production, collapsing the price of oil. Neither can Russia countenance losing its lucrative oil concessions in Iraq, which it won under questionable circumstances and which a new Iraqi government may challenge. The legitimacy of contracts with sovereign nations ultimately rests upon the legitimacy of the nations’ rulers, who, in effect, act as agents for the state.

Saddam Hussein’s regime has no legitimacy among most of Iraqi’s various minorities or its Shiite majority. A challenge by a successor Iraqi regime of Russia’s extensive interests in Iraq – the recovery of Russia’s outstanding debt as well as the exploitation of its oil concessions – may well meet with success.

Next to Russia, France is Iraq’s largest creditor and also unlikely to recover its debt. France has been a knowing accomplice in Saddam’s subjugation of Iraqis and, in many ways, the west’s most important arms supplier to Iraq, providing Mirage jets and Exocet missiles among other weapons. Like Russia, France has a major stake in Iraq’s oil fields: French oil giant TotalFinaElf holds Iraq’s largest oil stake, with exclusive negotiating rights to develop Majnoon and Bin Umar, fields with reserves totaling 26 billion barrels.

These commercial relations are now at great peril for both France and Russia, Iraq’s largest non-Arab trading partners. Until recently, these two countries had expected to capitalize on the close relationship that they had cultivated with Saddam, following the lifting of UN sanctions on Iraq. The U.S. drive to oust Saddam’s regime dashed these expectations; worse, the U.S. actions threaten to cost France and Russia their past investments, creating economic debacles of major proportions.

The Doctrine of Odious Debts, though it has been little used, is well known to France, Russia, and the United States. The doctrine originated a century ago with the Spanish-American War, when the U.S. repudiated Cuba’s Spanish debts, saying they were “imposed upon the people of Cuba without their consent and by force of arms.” Furthermore, the Americans argued successfully, much of the borrowing was designed to crush attempts by the Cuban population to revolt against their domination, and was spent in a manner contrary to their interest. After the Russian Revolution of 1917, when the Bolsheviks attempted to repudiate Russia’s debts indiscriminately, the Doctrine of Odious Debts was developed to determine which debts were legitimate and which illegitimate. This work was conducted by Alexander Nahum Sack, a professor of law in Paris, who authored two major works on the obligations of successor systems and coined the phrase, “dettes odieuses.” According to the doctrine, the debts accumulated by despots were “personal” to the despot, giving lenders no recourse: “The creditors have committed a hostile act with regard to the people; they can’t therefore expect that a nation freed from a despotic power assume the “odious” debts, which are personal debts of that power.”

Apart from Great Britain vs Costa Rica, where Chief Justice Taft of the U.S. Supreme Court, sitting as an arbitrator, decided in 1923 that loans made by the Royal Bank of Canada to the regime of a Costa Rican dictator were personal, successor states have been reluctant to invoke the Doctrine of Odious Debts, out of fear that international lenders would boycott a fledgling regime. This is the case in South Africa, where a large segment of the population wants to brand apartheid-era debts as “odious,” after Desmond Tutu’s Truth and Reconciliation Commission endorsed the concept.

The reluctance to use the doctrine may soon change, in part because a proposal by Harvard economists to establish an international body to adjudicate odious debts has caught the attention of the International Monetary Fund, which has been giving the concept official heft by promoting it at an IMF seminar and in the IMF’s quarterly journal, Finance and Development. Scholars at the London School of Economics and McGill University have also given the concept credibility, as has its adoption by the world’s churches, through the Jubilee debt-relief movement, and citizens groups throughout the Third World.

But necessity – on the part of the new Iraqi regime and on the part of the Bush administration – may also drive the doctrine’s adoption. Because Saddam all-but-bankrupted Iraq in his ruinous war with Iran, Iraq was unable to service its debt through its oil earnings, even prior to the Gulf War. Saddam attempted to seize Kuwait, in fact, partly to service its debts to the countries that financed its military buildup.

Today, Iraq’s financial straits are more dire still – its oil fields are in disrepair while its debt has increased – and it also faces immense Gulf War reparations for the damage it inflicted on Kuwait and its oil fields. To become solvent and a model for responsible government in the Middle East, to be credible with its own oppressed populations, which will not want to be taxed to repay the regimes that armed Saddam against them, a successor Iraqi government will need to shed debt as well as restore oil production.

The Bush administration may soon face vexing choices. Will it attempt to divide the Iraqi spoils among its allies, including Russia and France should they ultimately decide to support a war effort, and thus create cynicism throughout the Middle East and the world? Or will the Bush administration attempt to make Iraq a showcase for responsible government in the Middle East, by enabling the Iraqi people to cast off the odious debts brought upon them by an illegitimate regime and by giving the other peoples of the region an inkling of what a future without odious rulers could hold for them.

Lawrence Solomon is the executive director of Urban Renaissance Institute and a founder of Probe International. E-mail: LawrenceSolomon@nextcity.com

The doctrine of odious debts

by Patricia Adams

National Post, February 12, 2003

‘They are debts created by the Government of Spain, for its own purposes and through its own agents, in whose creation Cuba had no voice.” As such, the Americans argued after the Spanish American War, these debts could not be considered local (Cuban) debts, nor could they be binding on a successor state.

As for the lenders, the Americans replied that “the creditors, from the beginning, took the chances of the investment. The very pledge of the national credit, while it demonstrates on the one hand the national character of the debt, on the other hand proclaims the notorious risk that attended the debt in its origin, and has attended it ever since.”

The dispute over the “Cuban debts” became one of the most contentious cases of debt repudiation – repudiation caused not because the debts imposed an excessive burden on the successor, but because they were contracted for illegitimate purposes by illegitimate parties. Such debts became known in law as “odious debts.”

The legal doctrine of odious debts was given shape by Alexander Nahum Sack a quarter of a century after the settlement of the Spanish-American War. With colonial territories becoming independent nation states and colonies changing hands, with monarchies being replaced by republics and military rule by civilian, with constantly changing borders throughout Europe, and with the ascendant new ideologies of socialism, communism and fascism overthrowing old orders, Sack’s debt theories dealt with the practical problems created by such transformations of state. Like many others, Sack believed that liability for public debts should remain intact, for these debts represent obligations of the state – the state being the territory, rather than a specific governmental structure. This he based not on some strict dictate of natural justice, but on the exigencies of international commerce. Without strong rules, he believed, chaos would reign in relations between nations, and international trade and finance would break down.

But Sack believed that debts not created in the interests of the state should not be bound to this general rule. Some debts, he said, were “dettes odieuses:”

“If a despotic power incurs a debt not for the needs or in the interest of the State, but to strengthen its despotic regime, to repress the population that fights against it, etc., this debt is odious for the population of all the State.

This debt is not an obligation for the nation; it is a regime’s debt, a personal debt of the power that has incurred it, consequently it falls with the fall of this power.

The reason these ‘odious’ debts cannot be considered to encumber the territory of the State, is that such debts do not fulfill one of the conditions that determine the legality of the debts of the State, that is: The debts of the State must be incurred and the funds from it employed for the needs and in the interests of the State.

‘Odious’ debts, incurred and used for ends which, to the knowledge of the creditors, are contrary to the interests of the nation, do not compromise the latter – in the case that the nation succeeds in getting rid of the government which incurs them – except to the extent that real advantages were obtained from these debts. The creditors have committed a hostile act with regard to the people; they can’t therefore expect that a nation freed from a despotic power assume the ‘odious’ debts, which are personal debts of that power.

Even when a despotic power is replaced by another, no less despotic or any more responsive to the will of the people, the ‘odious’ debts of the eliminated power are not any less their personal debts and are not obligations for the new power …

One could also include in this category of debts the loans incurred by members of the government or by persons or groups associated with the government to serve interests manifestly personal – interests that are unrelated to the interests of the State.”